Better than a zero-sum game

The warm glow of a static price line will, however, be short-lived. The government is committed to switching to a more holistic inflation index this July, that incorporates the service sector, polls retail prices and bring the base forward to 2004-05.

Headline inflation is on the verge of turning negative because of a statistical inevitability. The 0.44 per cent rate of inflation for the week ending March 7 coincides with the beginning of a spike last year that took the rate to an eye-popping 12.63 per cent in August 2008. Between March and August 2008, the rate had climbed from 6 per cent to over 12 per cent before falling back again to 6 per cent in December. A world in recession and increasingly averse to risk is unlikely to witness the surge in oil and other commodity prices that led to last year’s runaway inflation. The happy fallout is that the wholesale inflation rate in India will remain negative or slightly above zero for the rest of 2009. It is another matter that retail inflation was holding out at 10.4 per cent in January, but that, too, should start trending lower as lower costs wend their way to shop shelves.

This unprecedented window significantly widens options for policymakers thrashing about for elbow room. For one, it permits monetary easing with a degree of aggression not on display since the dollars started fleeing back to the US. Technically, the central bank can drop its overnight interest rates to zero without making money free for banks. Rate cuts by the Reserve Bank of India have been trailing market expectations and the clamour for another one is rising. Zero inflation gives RBI Governor Duvvuri Subbarao the space to pump more money than what the government’s spend-and-borrow budget is sucking up.

The warm glow of a static price line will, however, be short-lived. The government is committed to switching to a more holistic inflation index this July, that incorporates the service sector, polls retail prices and bring the base forward to 2004-05. The under-reporting inherent in an index of wholesale prices — that ignores over half the country’s economic activity — and from a base year as distant as a decade-and-a-half away was in desperate need of correction. Nevertheless, a more realistic picture on prices will not alter the situation on the ground: cost-push inflation is one worry less for our crisis managers, at least in the short-term. Here’s hoping it will help focus their minds on steering the economy out of the current one.